It is disaggregated at the rural and urban levels. The new overallÂ all India CPIÂ is a weighted average of the two. This is in contrast with the earlier CPIs which represented subsets of the population (industrial workers, agricultural labourers, rural labourers, etc.).

The new series has better geographical as well as commodity coverage. The basket of consumer goods has risen from 25 to 250.

The weights have been derived from the 61st round of the NSS consumer expenditure survey (2004-05).

Data for the urban CPI will be collected from 310 towns (compared to 78 in the current CPI-IW, for all India). The rural CPI will use data from 1181 villages. Field officers of the NSSO and the Department of Post will be the price collection agents for urban and rural centers respectively.

Let’s look at three things that help get a deeper understanding of CPI. The first one is CPI components, and the second one is how this measure is calculated, and finally how is this different from WPI.

Components of India’s CPI

The CPI is calculated for rural areas, and urban areas, and then a combined weight is used to determine the national average. Here are the constituents of CPI.

Sub group/group

Rural

Urban

Combined

Cereals and products

19.08

8.73

14.59

Pulses and products

3.25

1.87

2.65

Milk and milk products

8.59

6.61

7.73

Oils and fats

4.67

2.89

3.9

Egg, fish and meat

3.38

2.26

2.89

Vegetables

6.57

3.96

5.44

Fruits

1.9

1.88

1.89

Sugar etc

2.41

1.26

1.91

Condiments and spices

2.13

1.16

1.71

Non- alcoholic beverages

2.04

2.02

2.03

Prepared meals etc

2.57

3.17

2.83

Pan, tobaccoÂ and Intoxicants

2.73

1.35

2.13

Food, beverages and tobacco

59.31

37.15

49.71

Fuel and light

10.42

8.4

9.49

Clothing and bedding

4.6

3.34

4.05

Footwear

0.77

0.57

0.68

Clothing, bedding and footwear

5.36

3.91

4.73

Housing

Â

22.53

9.77

Education

2.71

4.18

3.35

Medical care

6.72

4.34

5.69

Recreation and amusement

1

1.99

1.43

Transport and communication

5.83

9.84

7.57

Personal care andÂ effects

3.05

2.74

2.92

Household requisites

4.48

3.92

4.3

Others

1.12

0.99

1.06

Miscellaneous

24.91

28

26.31

Total

100

100

100.00

The most obvious thing about these components is how the weight for housing is zero in rural areas, but it’s a very high 22.53% in urban areas. If anyone has any insights as to why that is, please leave a comment.

How is CPI data collected?

Surveys are conducted to collect price data in urban and local areas. In the urban areas, 310 towns have been identified in the urban areas where the data is collected, and similarly there are 1,182 villages from where data is collected for rural areas. Interestingly, the post office workers are used to collect data in rural areas while employees of NSSO collect data in urban areas. So, this index is a result of survey done every month that helps establish the index values.

I think one of the first things you notice in this list is that there is no housing, which is rather ridiculous for widely watched index when you consider how much people in cities pay for housing either in the form or rent or even worse high prices and EMIs. (Read: Thoughts on an Indian Real Estate Bubble).

There is no section for services as well, as the WPI is simply broken down into primary articles, fuel power and manufactured products.

The WPI also undergoes frequent revisions and those aren’t small either, and as far as I know CPI hasn’t gone through such big revisions so far.

Conclusion

Looking at the constituents, and the way the data is collected for the CPI index tells you that you can’t really look at this index as the absolute truth, and it is better served as an indicator of magnitude as well as direction of inflation and you shouldn’t give much weight to the number in a given month but rather how the direction is moving and what the magnitude is. I also feel that the CPI is a much better indicator than the WPI because of the way it is structured and because it doesn’t suffer from the frequent revisions that the WPI does.

Good and educative as usual.
It is also good for each individual family to keep an account of regular monthly expenses and arrive at its own CPI.My family consists of self and wife,both senior citizens.We stay in Bangalore in our own house and have no liabilities and no dependents.

I think you have brought up this point several times in earlier comments as well. And it should be obvious to anyone reading how their inflation will be different from yours if they rent a place or have kids that go to school.

“Housing group has not been given any weightage in the rural areas CPI as its share is around 1% and it has been distributed to other groups on pro rata basis. CPI (Urban) has a weightage of 22.53% in respect of Housing group.”

Some thoughts:
1. Why should “pan tobacco and intoxicants” have a higher weight than say “fruits” or “sugar”?
2. In fact, why are items such as “pan, tobacco and intoxicants” there in the list at all?
3. Why does “transport and communication” for urban folk have such a high weight?

The idea is to give weight to those things in the proportion that people spend their income on. So that’s why these weights. If you remove pan, and people spend so much money on pan and tobacco, then your index won’t be accurate because it doesn’t cover one big thing that people spend their money on.